Alberta could owe 'tens of millions' in tax dispute over out-of-province trust

Alberta may have to cough up an estimated $17.4 million that federal authorities say was improperly paid to it by a trust that claimed residency in the province to avoid higher taxes elsewhere in the country.

Auditors with the Canada Revenue Agency are battling in court with the trustee for a prominent and prosperous Newfoundland family over its attempt to enjoy the so-called Alberta Advantage without actually moving.

A CRA official provided figures Tuesday that show the case is one of more than 200 audits of trusts in the province over the past three years that has resulted in the assessment of an additional $27.8 million in tax owing.

The Herald estimates the potential loss to Alberta’s treasury from these reassessments could be at least two times that figure, or approximately $55.6 million.

The current legal dispute — one of several a tax expert predicts could end up before the courts — centres on where tax returns should have been filed for a trust established by St. John’s industrialist Craig Dobbin and that ended up with $137.7 million in proceeds from the 2008 sale of CHC Helicopter Corp.

The trust was established by Dobbin in St. John’s, N.L., in 2002, and his five children were named as trustees and beneficiaries.

But months before his 2006 death after a long illness, the children resigned as trustees and appointed Royal Trust as their successor.

While the children continued to live in Newfoundland, Royal Trust began administering the trust’s holdings from its Calgary offices.

After selling its interest in CHC to a private U.S. concern in 2008, the trust paid taxes in Alberta and then sent each of Dobbin’s children a cheque for $24 million.

But CRA auditors now contend the estimated $17.4 million paid to Alberta’s treasury should have been sent instead to Newfoundland, plus an additional $8.8 million because of that province’s higher tax levies at the time. The agency has also assessed arrears interest of $1.4 million.

“At all relevant times, the Dobbin children, either directly or indirectly, made all decisions regarding the management and control of the trust,” CRA said in its response last month to the trust’s appeal of the tax reassessment.

When Dobbin died after a long battle with a type of pulmonary fibrosis in October 2006, he was lauded for his proud support of his province and his many acts of philanthropy.

During an interview, Mark Dobbin, his eldest son and one of the trust’s five beneficiaries, characterized a Herald reporter’s question about the appropriateness of the moves to minimize tax as the “most leading” he had ever heard.

“As an individual, I always pay all the taxes that are due to be paid by me, as do the companies in which I invest,” Dobbin said.

He said CRA’s contention that Royal Trust acted at the direction of him and his siblings and was not managed and controlled from Calgary as required by tax law was “patently false.”

At the time of the transactions, Alberta’s levy on income was up to six per cent lower than Newfoundland’s, and the marginal rate on dividends was up to 12 percentage points less.

Newfoundland Finance Minister Jerome Kennedy was not available for an interview, but a spokesman said the province doesn’t consider tax avoidance to be a widespread problem.

“This is a strategy employed by a relatively small number of individuals with extremely high net worth who pay a significant amount of income tax at the top rate,” Tansy Mundon said in an email reply to questions.

While Newfoundland has recently lowered its rates and thus reduced the incentive for its residents to rate shop among provinces, Alberta continues to be an alluring tax haven for well-heeled taxpayers living elsewhere in the country.

For example, a resident of Nova Scotia would save 11 per cent, or $110,000, tax on income of $1 million by filing through an Alberta resident trust instead of paying in their home province.

Alberta Finance could provide no figure on the amount of money it has had to hand over to other provinces as a result of the CRA audits.

But assuming the trusts examined by the agency over the past three years gained an average five per cent rate advantage from Alberta’s top marginal levy of 10 per cent, the Herald estimates the tax hit to the province could now be at least two times the $27.8 million amount CRA has reassessed.

Calgary accountant Kim Moody, who advises individuals on complex tax planning, has said he estimates the province may have “tens of millions” of dollars at risk as a result of the audits.

While many of the cases could be settled quietly, Moody said some will end up in court as Alberta trusts battle against the CRA demands for additional money.

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Alberta could owe 'tens of millions' in tax dispute over out-of-province trust